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How to cure a $40 billion automotive warranty headache
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Insight
Jul 28, 2022
How to cure a $40 billion automotive warranty headache
Science has shown that humans are less rational than expected. No area of our lives is immune from cognitive biases which, if left unchecked, can have major consequences. Take this example; Warranty Week shows that OEMs spent nearly $44 billion on warranty expenses in 2020.
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While some vehicle faults are unavoidable, a lot can be prevented. For example, electronic hardware fractures can often be avoided with materials that provide more durable alternatives. That is a simple case of weighing the cost of new materials with the benefits they may provide. Critical, when you consider the move towards higher levels of autonomy.
Price or second order consequences, which do you consider critical?
When focusing on ADAS materials, price is an important consideration for Tier 1 suppliers and OEMs. Nevertheless, materials are often specified on the grounds that they have an upfront lower cost, without due consideration of the second-order consequences of this decision in the form of reduced performance and reliability. In many cases additional work-around design steps are required to achieve desired vehicle performance or reliability.
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These issues have a measurable impact on our warranty figure. When also factoring in the potential reputational and brand risk associated with recurring performance and warranty issues, this figure becomes even more staggering. Given the magnitude of this issue in financial and reputational terms, the need to overcome the loss aversion bias and develop better-informed systems for identifying the best choice of ADAS materials becomes clear.
“Warranty failures connected to electronics already stands between 30-40%”
Level 3 technology will accentuate current reliance on electronic hardware
As we continue on our transition towards Level 3 technology and beyond, the number of in-vehicle sensors and processing power requirements will increase, carrying additional risk of electronic hardware failure. The proportion of automotive warranty failures connected to electronics already stands between 30-40%, with ADAS accounting for an ever-growing portion of this. Advanced safety is a rapidly growing segment of automotive electronics . Taking this into account, carmakers may well be forced to increase their warranty provisions unless they can develop a more robust methodology for identifying the best materials to use for these systems. Materials are the bedrock of ADAS , and when these are compromised, this places vehicle hardware at risk.
Managing cost will always be important but should be balanced against a more holistic evaluation of the reliability and performance benefits of opting for a superior, yet more costly, alternative choice of material.
The coin experiment
On a rational level, we know that spending more upfront on better materials will reap major benefits, and yet, this does not always translate into real-world actions. The reason has to do with the loss aversion bias, a phenomenon identified by behavioral economists whereby humans are more afraid to lose what they already have than they are keen on getting more.
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In a famous experiment, people were asked if they would accept a bet based on the flip of a coin. If the coin came up tails the person would lose $100, and if it came up heads, they would win $200. The results of the experiment showed that on average people needed to gain about twice as much as they were willing to lose in order to proceed with the bet.
Long-term thinking for long-term results
To give a practical example of this, let us assume the cost of a radar sensor is $50. The amount of conventional solder paste on this sensor would cost about $0.07 compared with an enhanced reliability solder paste with a unit cost of $0.14. An engineer who was influenced by the loss aversion bias would opt for the cheaper alternative to halve their cost outlay, discarding the fact that the $0.14 option has a life expectancy that is 40% superior. By selecting the cheaper material, you are increasing your exposure to material failure and additional warranty costs. When viewed in relation to a mounting $40 billion warranty cost for the entire automotive industry, suddenly a $0.07 unit saving is much less appealing!
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Recognizing how the loss aversion bias and a short-term fixation on reducing unit costs might be a step in reducing warranty related costs. Developing a scientific methodology for comparing material choices, in a way that factors in the additional performance and reliability benefits, will help to inform better decisions that will reduce OEM exposure to excessive warranty costs and reputational damage.
As we progress towards advanced vehicle autonomy, advanced safety features become the brain of the car and should be prioritized as such. Doing so will ensure the safety of vehicle users, as well as the OEMs brand, while helping to minimize costly systems failures and performance issues. Unlike the coin experiment, the stakes of choosing the wrong ADAS materials are way too high to leave to chance.
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